ROBINSON v. SYNCHRONOSS TECHNOLOGIES, INC. et al
Filing
75
OPINION filed. Signed by Chief Judge Freda L. Wolfson on 6/28/2019. (jem)
*NOT FOR PUBLICATION*
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
IN RE SYNCHRONOSS
TECHNOLOGIES, INC. DERIVATIVE
LITIGATION
___________________________________
Civil Action No. 17-2978 (FLW) (LHG)
THIS DOCUMENT RELATES TO:
OPINION
ALL ACTIONS
WOLFSON, Chief United States District Judge:
Presently before the Court is a motion by Defendants Synchronoss Technologies, Inc.
(“Synchronoss” or the “Company”), Stephen G. Waldis (“Waldis”), and Karen L. Rosenberger
(“Rosenberger”) (collectively, “Defendants”), to dismiss Lead Plaintiff Employees Retirement
System of the State of Hawaii’s (“Plaintiff”) Amended Class Action Complaint pursuant
to Federal Rules of Civil Procedure 9(b) and 12(b)(6). In this putative class action securities
litigation, Plaintiff alleges that it, and other similarly situated investors, purchased Synchronoss’s
stock between October 28, 2014 and June 13, 2017 (the “Class Period”), and that Defendants
have violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15
U.S.C. § 78j(b), and Rule 10b–5 promulgated thereunder, 17 C.F.R. § 240.10b–5; in addition,
Plaintiff avers that Defendants Waldis and Rosenberger (collectively, “Individual Defendants”)
have violated Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Specifically, Plaintiff
asserts that Defendants fraudulently inflated Synchronoss’s stock by knowingly falsifying the
Company’s publicly reported revenues, and that Plaintiff and other investors relied on these
material misrepresentations and omissions to their detriment. Defendants move to dismiss the
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Amended Complaint on the basis that Plaintiff has failed to plead with particularity that
Defendants acted with scienter, an element of a Section 10(b) claim, and because any forwardlooking misstatements are protected by the Private Security Litigation Reform Act’s (“PSLRA”)
Safe Harbor provision, 15 U.S.C. § 78u–5(c). For the reasons stated herein, Defendants’ motion
is granted, and Plaintiff's claims are dismissed without prejudice; however, Plaintiff is given
leave to amend its Amended Complaint consistent with this Opinion within 30 days from the
date of the Order accompanying this Opinion.
I.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
A. Defendants
The following allegations are taken from the Amended Complaint (“AC”) and are
assumed true for the purposes of review under Rule 12(b)(6). Synchronoss, a publicly traded
mobile technology services company,1 principally located in Bridgewater, New Jersey,
specializes in providing “Activation” and “Cloud” services to commercial mobile carriers,
including AT&T and Verizon. AC at ¶¶ 6, 31, 38, 40. Waldis founded Synchronoss and has
served as its Executive Chairman since 2000. Id. at ¶ 33. In addition, Waldis was the Company’s
CEO from its inception in 2000 until January 18, 2017, when he resigned as CEO. Id. Waldis
was reappointed as CEO on April 27, 2017, when his successor resigned as CEO. Id. He resigned
as CEO for a second time on November 13, 2017. Id. Rosenberger is the former Chief Financial
Officer and Executive Vice President of Synchronoss. Id. at ¶ 34. Rosenberger was the
Company’s CFO from April 2014 until April 1, 2017. Id. Prior to her appointment as CFO,
1
On May 14, 2018, a NASDAQ hearing panel suspended trading of shares of Synchronoss
common stock on NASDAQ due to Synchronoss’s failure to timely file its periodic financial
reports. AC at ¶ 31.
2
Rosenberger was the Company’s Chief Accounting Officer and Senior Vice President from
January 2012 until April 2014. Id.
B. Synchronoss’s Business
Synchronoss was founded in 2000 by Waldis, a former AT&T executive. Id. at ¶ 37.
Waldis established an ongoing relationship between the company and AT&T to provide
activation services to consumers who bought new mobile devices with AT&T as service
provider. Id. at ¶¶ 38-40. Synchronoss provided software licenses to AT&T that enabled the
consumer to simply open the box, automatically activate the cell phone and troubleshoot issues
using a Synchronoss customer service call center. Id. at ¶ 38. Synchronoss enjoyed considerable
success from this “Activation” business through 2012 and into 2013-2014. Id. at ¶¶ 38-39.
Beginning in 2013, the Activation business began to deteriorate, and the Company looked
for other areas of growth, especially because one customer, AT&T, accounted for an exceedingly
large amount of its revenues (80% at one point). Id. at ¶¶ 39-40. To offset slowing growth, the
Company created a “Cloud” business. Id. at ¶ 40. The “Cloud” is a network of Internet servers
used to store and process data after a device is activated and in use, and provides “back-up” for
cell phone and personal computer data. Id. at ¶¶ 40-43, 60-64. Similar to “Activation,” revenue
for the “Cloud” business was generated primarily via software licensing agreements between the
Company and service providers such as Verizon. Id. at ¶¶ 44-52. Along with AT&T, Verizon
became, by far, one of Synchronoss’s two largest customers, which were responsible for more
than 60% of the Company’s revenues. Id. at ¶¶ 55-56. By 2015, the Cloud business generated
greater revenues than the Activation business. Id. at ¶ 54. However, by 3Q2015, Cloud revenue
growth slowed. Id. at ¶ 77. Faced with slowing growth, a slumping stock price, and more
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pressure to produce revenues, Plaintiffs allege that Defendants fraudulently booked revenues in
order to artificially inflate the stock price.
C. Allegedly Fraudulent Transactions
Plaintiff relies on the allegations of three Confidential Witnesses (“CW”) regarding
several allegedly fraudulent transactions into which Synchronoss entered. First, according to
CW2, a Synchronoss employee from 2008-16 at the Vice-President level, who was responsible
for overseeing contracts with the Company’s largest customers, id. at ¶ 10, Synchronoss booked
revenues of approximately $7 million in connection with two purported AT&T purchase
transactions in late 2015 that did not occur. Id. at ¶¶ 174-75. CW2 stated that he was then
“expressly tasked by Company management in 2016 with finding a way to retroactively justify
the revenue numbers that had already been reported in 2015.” Id. at ¶ 10. “[A]ccording to CW2,
the practice [of booking revenues early and seeking to justify them later] also repeatedly caused
Synchronoss to scramble to make [its] financial reports seem legitimate to auditors.” Id. at ¶ 11.
The Amended Complaint alleges that the recognition of this $7 million in AT&T revenue
enabled Synchronoss to falsely meet its guidance in 4Q2015. Id. at ¶¶ 180-81.
Second, CW1 was a former Synchronoss financial analyst, CPA, and certified fraud
examiner, who worked at the company from December 2015 to May 2016 with responsibility for
revenue forecasting. Id. at ¶¶ 9, 163. CW1 claimed that he had personal knowledge that
Synchronoss improperly and prematurely recognized $5 million in revenue from a purported
contract with Verizon in 1Q2016 (ending Mar. 31, 2016), id. at ¶ 163, even though “this Verizon
deal was only in initial discussion phases in March 2016, and was still unsigned in April 2016,
after the quarter closed.” Id. at ¶ 165. CW1 attended an April 2016 meeting in Bridgewater—
which occurred after the close of Synchronoss’s 2016 first quarter—where he saw Rosenberger
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ask Synchronoss’s Executive VP and General Manager Joel Silverman whether the Verizon
contract had been signed. Id. The allegedly improper recognition of this $5 million in revenue
from an unsigned contract with Synchronoss’s largest customer apparently enabled the Company
to meet its guidance when it reported its 1Q2016 results. Id. at ¶ 164. A short time later, the SEC
requested, twice, that Synchronos attach its written contracts with Verizon to its SEC filings, but
Synchronoss allegedly refused both times. Id. at ¶¶ 167-73.
Third, CW3, a former Synchronoss accountant who worked at the company from 2011 to
April 2017, and had certain expense accounting functions, id. at ¶ 93, recalled that he witnessed a
Senior Accountant at Synchronoss vehemently protest a directive from management to book $25
million in revenue from a transaction with Verizon in 3Q2016— “kicking and screaming,”
according to CW3—because the Company lacked substantiation for the deal. Id. at ¶ 94.
According to CW3, the Senior Accountant protested that the decision to book the revenue went
“against procedures” that stated Synchronoss had to have “x, y, and z, signed and sealed and
delivered before” revenue could be recognized. Id. CW3 reported that executive management,
including Rosenberger, instructed the Senior Accountant to book the revenue despite these
objections. Id.
In addition to these three allegedly fraudulent transactions, Plaintiff alleges, based on the
testimony of CW3, that Rosenberger personally directed manipulation of financial results every
quarter during her tenure as CFO (Apr. 2014 to Apr. 2017). Id. at ¶¶ 13, 149, 231-39. This
alleged scheme involved the misclassification of expenses and other financial metrics in order to
avoid having to report a decrease in profit margins. Id. at ¶¶ 231-36. According to CW3, Andrew
Latyszonek, a Synchronoss financial analyst, prepared a “flash file” on a weekly basis for the
purpose of listing which expenses to bury or remove “down below the line” so as to show
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attractive, but false, margins in Synchronoss’s financial reports. Id. at ¶ 233. Latyszonek would
then send this “flash file” to Rosenberger via email, who would approve the reclassified
expenses in emails. Id. The allegedly manipulated entries ranged from a few hundred thousand
dollars to $1 million each and, according to CW3, were “enough to move the needle and be
material from an audit standpoint.” Id. at ¶ 234. CW3 allegedly had access to the relevant
information in the Company’s Oracle financial system, and used that system to compare the
“actual” figures against the “adjusted” figures that were publicly reported after Latyszonek,
allegedly with Rosenberger’s approval, “massaged, reclassified, and otherwise manipulated
them.” Id. at ¶ 233.
As one example, in connection with Synchronoss’s March 2016 acquisition of Openwave
Messaging (“Openwave”), a messaging, security, and identity management firm servicing
telecommunications carriers, id. at ¶ 58, CW3 testified that Synchronoss reclassified salaries of
sales employees as “research and development” (“R&D”) costs, when in truth they should have
been classified as “sales” costs. Id. at ¶¶ 235-36. According to Plaintiff, this reclassification was
significant because R&D expenses are tax-deductible whereas sales costs are not and, in
addition, R&D expenses are viewed more favorably by investors because they signal investment
in future growth, whereas sales costs erode current margins without future benefit. Id. at ¶ 235.
CW3 claimed to be personally tasked with “pushing” salaries of Openwave sales employees
from sales to R&D expense in 2Q2016. Id. CW3 testified that he or she confirmed with an
Openwave Senior Vice President that the employees whose expenses were being reclassified
were not part of Openwave’s R&D team, and then objected to the reclassification of these
expenses. Id. Although CW3 does not claim to have had personal contact with Rosenberger, he
claims to know that Rosenberger approved this misclassification of expenses, including
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purporting to know of an email that Rosenberger wrote to Latyszonek approving the
classification. Id. at ¶ 236.
Finally, with Synchronoss’s activation business struggling, in December, 2016, the
company announced that it was borrowing $900 million to acquire Intralinks Holdings, Inc.
(“Intralinks”), a cloud services provider, and made the head of Intralinks, Ronald Hovsepian, the
CEO of Synchnronoss, replacing Waldis. Id. at ¶¶ 104-107. Synchronoss simultaneously
announced that it would divest 70% of its Activation business in a deal with a small, privatelyheld company known as Sequential Technology International, LLC (“Sequential”). Id. at ¶¶ 1416, 97-103. Synchronoss disclosed that it would retain 30% ownership of the Activation
business, and Sequential would pay $146 million to Synchronoss as a purchase price. Id. at ¶
101. Sequential funded the bulk of its acquisition of Synchronoss’s Activation business with a
Seller’s Note from Synchronoss of $83 million and an undisclosed guarantee to Goldman Sachs
of $30 million of a $40 million term loan Goldman Sachs had made to Sequential. Id. at ¶ 102.
Stated differently, according to Plaintiff, Synchronoss fronted Sequential nearly 60% of the
purchase price. Id. Also in connection with the Sequential transaction, Synchronoss and
Sequential had entered into a software license agreement under which Sequential obtained a
perpetual license for certain analytics software products owned by Synchronoss, which
Synchronoss had valued at $9.2 million. Id. at ¶ 108. Synchronoss booked the $9.2 million
licensing fee as revenue in the fourth quarter of 2016, but did not disclose that fact until months
later. Id. at ¶ 110.
D. Discovery of Alleged Fraud/Restatement of Financials
On February 24, 2017, the Southern Investigative Research Foundation published an
exposé, accusing Synchronoss of engaging in improper transactions with Sequential, with which
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Waldis has “friends and family” connections through an “obscure entity” known as Rumson
Hitters, LLC. Id. at ¶ 99-100. The report stated that “Synchronoss’s public statements about the
Activation unit’s buyer [i.e., Sequential] are incomplete, at best.” Id. at ¶ 122. The article
reported, inter alia, that Sequential is “a corporate shell, formed in early November,
2016….by…a former neighbor of Stephen Waldis and an early-stage Synchronoss investor,”
while “‘Rumson Hitters’ is an inside joke among the families of several of
Synchronoss’…founders like Waldis and his fellow Seton University [sic] Alum” who lives in
Rumson, and was formed to support Synchronoss business since its inception. Id. at ¶¶ 100, 123.
After the report was published, the company disclosed, for the first time, that fourth quarter 2016
revenues were artificially boosted by the $9.2 million licensing fee, and the Company’s stock
price sank more than 5% from a close of $30.49 on February 24, 2017 to $28.69 on February 27,
2017. Id. at ¶¶ 122-24, 367-69.
On April 1, 2017, Rosenberger resigned as CFO of Synchronoss—though she had
announced her intention to resign on that date well before the investigative report was
published—and was replaced by the former Intralinks CFO John Fredericks. Id. at ¶¶ 125, 127.
Less than a month later, on April 27, 2017, the Company announced that newly appointed CEO
and CFO, Hovsepian and Frederick, respectively, would resign to “pursue other interests” and
simultaneously announced a large miss of earnings guidance. Id. at ¶ 130. Waldis was reappointed CEO on April 27, 2017, a position he held until he stepped down a second time in
November 2017. Id. at ¶ 132-33.
In July 2018, Synchronoss filed restated financials for 2014-2016. Id. at ¶ 3. According to
the Amended Complaint, the Company admitted in the Restatement, inter alia, that: (a) it
“book[ed] revenues relating to a transaction in a period prior to there being sufficient
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documentation of an agreement with the customer about the transaction.,” id. at ¶ 144; (b)
“licensing fees were improperly accounted for on a gross basis as revenue,” id.; (c) its quarterly
and annual financial reports for 2014-2016 and its communications from 2014-2017 were false
and/or materially misstated and should no longer be relied upon, id. at ¶¶ 241-43; (d) it had
“pervasive material weaknesses” in internal controls from 2014-2017, id. at ¶ 242; and (e) it fired
three employees “for cause,” id. at ¶ 243. As a result of the Restatement, revenue for 2014-2016
was restated down from $1,212,168,000 to $1,032,271,000, a reduction of nearly $180 million
(or more than 14.8%), id. at ¶ 247, and net income of $93.5 million for 2014 through 2016 was
restated to a cumulative loss of $40 million (a difference of $134 million, representing a 143%
decrease in net income). Id. at ¶ 249.
E. Alleged Insider Sales
Plaintiff also makes a series of allegations that Rosenberger and Waldis cashed out
substantial insider trading profits before the Synchronoss stock collapsed. According to the
Amended Complaint, Rosenberger’s trading suspiciously ramped up just prior to her resignation.
For instance, Rosenberger sold 14,000 shares on December 27 and 28, 2016 at prices above
$39.50 per share for proceeds of $230,694.01, which, allegedly dwarfed Rosenberger’s prior
sales in December (as she had sold 0 shares in Dec. 2015, 0 shares in Dec. 2013, 50 shares in
Dec. 2012 and 2,749 shares in Dec. 2014). See id. at ¶ 350. Rosenberger then allegedly sold
another 12,453 shares from January 1 through February 21 at prices ranging from $38.84 to
$32.64 for $429,040 (during the same time period, she sold 9,499 shares in 2013, 4,200 shares in
2014, 5,518 shares in 2015, and 4,006 shares in 2016). See id. at ¶ 349. Waldis also sold
substantial stock during the Class Period, selling 569,800 shares for proceeds exceeding $18
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million Id. at ¶¶ 19, 351. Collectively, Waldis, Rosenberger and other Synchronoss insiders sold
$21 million in stock during the Class Period. Id. at ¶ 348.
Plaintiff admits that, according to the SEC Insider Forms 4 disclosing these sales, each of
these sales was made pursuant to a Rule 10(b)(5)-1 plan.2 Id. at ¶ 352. However, Plaintiff
surmises that given the changes in Waldis’s and Rosenberger’s patterns of stock sales in
Synchronoss, the Rule 10(b)(5)-1 plan applicable to Waldis’s and Rosenberger’s transactions
must have been amended once or more during the Class Period. Id. Defendants, for their part,
point to publicly filed SEC trading forms that reveal that Waldis and Rosenberger still held a
substantial amount of stock in the Company at the end of the class period—510,929 shares for
Waldis and 15,070 for Rosenberger (the most she held at any previous years end)—a period over
which Synchronoss’s shares declined in value from $53.67 at the Class Period high to $12.13.
See Frank Decl., Ex. K., ECF No. 66-13.
F. Allegedly False or Misleading Statements
Plaintiff premises its securities fraud claims on several allegedly false or misleading
statements made by the Company. These statements include: (a) statements describing revenues
for the current quarter, preceding quarter, year-to-date, or prior year-to-date, (b) guidance
statements projecting revenues for the impending quarter or year, (c) the statement that the
Company’s financial statements have been prepared in accordance with GAAP, (d) statements
describing the Company’s accounting practices respecting revenue recognition, and (e)
Sarbanes-Oxley certifications attesting to the truth and accuracy of the Company’s financial
reports, and the existence and effectiveness of the Company’s internal controls over financial
2
A Rule 10b5–1 plan is a written plan that allows corporate insiders to make prearranged stock
transactions. See 17 C.F.R. § 240.10b5–1(c).
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reporting and disclosures. AC at ¶ 255. Of these statements, most are historical statements
concerning the state of the Company’s finances and its accounting practices that, according to
Plaintiff, were revealed to be false or misleading by the Restatement. Only (b)—the guidance
statements projecting revenues—are so-called forward-looking statements potentially subject to
the PSLRA’s safe harbor provision.
As an example of the type of historical misstatements alleged, Plaintiff alleges that
Waldis and Rosenberger made misleading public statements in a November 2016 earnings call
discussing the $25 million Verizon deal. During the call, Waldis announced that Synchronoss
“signed a $25 million license deal with Verizon during the quarter,” id. at ¶ 89, and Rosenberger
explained to analysts that this deal with a “key customer” was documented in a “25 million
license deal signed and recognized in the [third] quarter.” Id. Analysts specifically asked
Rosenberger whether this $25 million Verizon deal was “baked into [Synchronoss’s] initial
guidance,” id. at ¶ 90, and Rosenberger replied: “Yes, so clearly that deal has been in the works
for little [sic] while and was clearly contemplated while we were giving guidance on our last
earnings call.” Id.
G. Procedural History
On Monday, May 1, 2017, two business days after the Company announced lower than
expected financials, Plaintiffs filed this action, alleging that the Company’s miss of its Q12017
projections was the result of an alleged fraud perpetrated by the Company and its senior
executives. ECF. No. 1. Following the consolidation of numerous similar complaints, but before
any consolidated complaint was filed, Synchronoss announced that it would be restating certain
prior financial results reported for the years 2014 through 2016. AC at ¶¶ 3, 5. Plaintiffs then
filed a Consolidated Complaint on November 20, 2017. ECF. No. 37. Defendants moved to
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dismiss the Consolidated Complaint in February 2018, ECF. No. 45, which was pending when
Synchronoss filed the Restatement on July 9, 2018. Lead Plaintiff filed its Amended Complaint
on August 24, 2018, adding allegations related to the Restatement and testimony from CW3. The
Amended Complaint brings claims under section 10(b) of the Exchange Act and under Section
20(a) of the Exchange Act, alleging that Defendants made material false or misleading
statements concerning its financial health and the status of certain contracts. Subsequently,
Defendants filed the present motion, arguing that Plaintiff’s claims must be dismissed for failure
to adequately allege scienter, and/or due to the application of the PSLRA safe harbor for
forward-looking statements.
II.
LEGAL STANDARD
Under Fed. R. Civ. P. 12(b)(6), a complaint may be dismissed for “failure to state a claim
upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). When reviewing a motion to dismiss
on the pleadings, courts “accept all factual allegations as true, construe the complaint in the light
most favorable to the plaintiff, and determine whether, under any reasonable reading of the
complaint, the plaintiff may be entitled to relief.” Phillips v. Cnty. of Allegheny, 515 F.3d 224,
233 (3d Cir. 2008) (quotations omitted). Under such a standard, the factual allegations set forth
in a complaint “must be enough to raise a right to relief above the speculative level.” Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Indeed, “the tenet that a court must accept
as true all of the allegations contained in a complaint is inapplicable to legal conclusions.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “[A] complaint must do more than allege the
plaintiff's entitlement to relief. A complaint has to ‘show’ such an entitlement with its facts.”
Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009).
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However, Rule 12(b)(6) only requires a “short and plain statement of the claim showing
that the pleader is entitled to relief” in order to “give the defendant fair notice of what the . . .
claim is and the grounds upon which it rests.” Twombly, 550 U.S. at 555. The complaint must
include “enough factual matter (taken as true) to suggest the required element. This does not
impose a probability requirement at the pleading stage, but instead simply calls for enough facts
to raise a reasonable expectation that discovery will reveal evidence of the necessary element.”
Phillips, 515 F.3d at 234 (citation and quotations omitted); Covington v. Int’l Ass’n of Approved
Basketball Officials, 710 F.3d 114, 118 (3d Cir. 2013) (“[A] claimant does not have to set out in
detail the facts upon which he bases his claim. The pleading standard is not akin to a probability
requirement; to survive a motion to dismiss, a complaint merely has to state a plausible claim for
relief.” (citation and quotations omitted)).
In sum, under the current pleading regime, when a court considers a dismissal motion,
three sequential steps must be taken: first, “it must take note of the elements the plaintiff must
plead to state a claim.” Connelly v. Lane Constr. Corp., 809 F.3d 780, 787 (3d Cir. 2016)
(quotations omitted). Next, the court “should identify allegations that, because they are no more
than conclusions, are not entitled to the assumption of truth.” Id. (quotations omitted). Lastly,
“when there are well-pleaded factual allegations, the court should assume their veracity and then
determine whether they plausibly give rise to an entitlement to relief.” Id. (quotations and
brackets omitted).
“Independent of the standard applicable to Rule 12(b)(6) motions,” Fed. R. Civ. P. 9(b)
“imposes a heightened pleading requirement of factual particularity with respect to allegations of
fraud.” In re Rockefeller Ctr. Props. Secs. Litig., 311 F.3d 198, 216 (3d Cir. 2002); see also Fed.
R. Civ. P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the
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circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a
person's mind may be alleged generally.”). To satisfy this heightened pleading standard, a
plaintiff must state the circumstances of his alleged cause of action with “sufficient particularity
to place the defendant on notice of the 'precise misconduct with which [it is] charged.’”
Frederico v. Home Depot, 507 F.3d 188, 200 (3d Cir. 2007) (quoting Lum v. Bank of America,
361 F.3d 217, 223-24 (3d Cir. 2004)). Specifically, the plaintiff must plead or allege the “date,
time and place of the alleged fraud or otherwise inject precision or some measure of
substantiation into a fraud allegation.” Frederico, 507 F.3d at 200 (citing Lum, 361 F.3d at 224).
Indeed, the Third Circuit has advised that, at a minimum, Rule 9(b) requires a plaintiff to allege
the “essential factual background that would accompany ‘the first paragraph of any newspaper
story’—that is, the ‘who, what, when, where and how’ of the events at issue.” In re Suprema
Specialties, Inc. Sec. Litig., 438 F.3d 256, 276-77 (3d Cir. 2006) (quoting In re Rockefeller, 311
F.3d at 216).
In addition to Rule 9(b)’s heightened pleading requirements, Congress enacted the
PSLRA, 15 U.S.C § 78u, et seq., to require an even higher pleading standard for plaintiffs
bringing private securities fraud actions. In re Suprema, 438 F.3d at 276. This heightened
pleading standard is targeted at preventing abusive securities litigation. See Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (“Private securities fraud actions . . . if
not adequately contained, can be employed abusively to impose substantial costs on companies
and individuals whose conduct conforms to the law.”); Merrill Lynch, Pierce, Fenner & Smith
Inc. v. Dabit, 547 U.S. 71, 81 (2006) (identifying “ways in which the class-action device was
being used to injure the entire U.S. economy” and listing examples such as “nuisance filings,
targeting of deep-pocket defendants, vexatious discovery requests, and manipulation by class
14
action lawyers of the clients whom they purportedly represent . . .”) (quotes and citations
omitted).
The PSLRA provides two distinct pleading requirements, both of which must be met in
order for a complaint to survive a motion to dismiss. Institutional Investors Group v. Avaya, Inc.,
564 F.3d 242, 252 (3d Cir. 2009). First, under 15 U.S.C. § 78u-4(b)(1), the complaint must
“specify each allegedly misleading statement, why the statement was misleading, and, if an
allegation is made on information and belief, all facts supporting that belief with particularity.”
Winer Family Trust v. Queen, 503 F.3d 319, 326 (3d Cir. 2007) (construing 15 U.S.C. § 78u4(b)(1)). Second, the complaint must, “with respect to each act or omission alleged to violate this
chapter, state with particularity facts giving rise to a strong inference that the defendant acted
with the required state of mind.” 15 U.S.C. § 78u-4(b)(2).
Both provisions of the PSLRA require facts to be pled with “particularity.” Avaya, 564
F.3d at 253. This particularity language “echoes precisely Fed. R. Civ. P. 9(b).” In re Advanta
Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999); see Fed. R. Civ. P. 9(b) (“[A] party must
state with particularity the circumstances constituting fraud or mistake.”). Indeed, although the
PSLRA replaces Rule 9(b) as the pleading standard governing private securities class actions, the
rule's particularity requirement “is comparable to and effectively subsumed by the requirements
of [§ 78u-4(b)(1) of] the PSLRA.” Avaya, 564 F.3d at 253 (citations omitted). This standard
“requires plaintiffs to plead the who, what, when, where and how: the first paragraph of any
newspaper story.” In re Advanta, 180 F.3d at 534 (quotations marks omitted).
III.
DISCUSSION
Defendants divide their dismissal motion into two parts. They argue that Plaintiff’s
Restatement-related claims stemming from Defendants’ historical statements fail because
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Plaintiff has not adequately pled that Defendants acted with scienter, and they also argue that
Defendants’ forward-looking revenue projections are protected by the PSLRA’s safe harbor
provision.3 I will first describe the elements of a § 10(b) claim before turning to these arguments.
A. Claims under Section 10(b) of the Exchange Act
The private right of action under Section 10(b) and Rule 10b-5 “creates liability for false
or misleading statements or omissions of material fact that affect trading on the secondary
market.” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1417 (3d Cir. 1997). In
relevant part, Rule 10b-5 makes it unlawful for an individual “[t]o make any untrue statement of
a material fact or to omit to state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not misleading . . . in connection
with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5(b). To state a claim under
Section 10(b) of the Exchange Act and Rule 10b-5, the plaintiff must allege: “(1) a material
misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale of a
security, (4) reliance, (5) economic loss, and (6) loss causation.” Gold v. Ford Motor Co., 577 F.
App’x 120, 122 (3d Cir. 2014) (citing Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42
(2005)).
Defendants contest only one element of Plaintiff’s 10b-5 claim: scienter. “Scienter”
stands for the “mental state [of] intent to deceive, manipulate or defraud.” Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 n. 12 (1976). Under this PSLRA's pleading requirement, a
plaintiff must “‘state with particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind.’” Avaya, 564 F.3d at 267 (quoting 15 U.S.C. § 78u-
As explained, infra, Plaintiff’s § 20(a) claim is derivative of its §10(b) claim, and thus, it will
rise and fall with the § 10(b) claim.
3
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4(b)(2)). The scienter standard requires a plaintiff to allege facts giving rise to a strong inference
“of either reckless or conscious behavior.” Advanta, 180 F.3d at 534-35. Courts must weigh the
“plausible, nonculpable explanations for the defendant's conduct” against the “inferences
favoring the plaintiff.” Tellabs, 551 U.S. at 324. A “strong inference” of scienter is one that is
“cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Id. at 314;
see id. at 324 (“The inference that the defendant acted with scienter need not be irrefutable, i.e.,
of the 'smoking-gun' genre, or even the most plausible of competing inferences” (internal
quotation marks omitted)).
“[I]n determining whether the pleaded facts give rise to a ‘strong’ inference of scienter,
the court must take into account plausible opposing inferences . . . . A plaintiff alleging fraud in a
§ 10(b) action . . . must plead facts rendering an inference of scienter at least as likely as any
plausible opposing inference.” Tellabs, 551 U.S. at 323, 28-29 (emphasis in original). “While
[courts] [] aggregate the allegations in the complaint to determine whether [they] create[] a
strong inference of scienter, plaintiffs must create this inference with respect to each individual
defendant in multiple defendant cases.” Winer Family Trust, 503 F.3d at 337 (quoting Makor
Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 603 (7th Cir. 2006) rev’d on other
grounds, 551 U.S. 308 (2007)).
In conducting the scienter analysis, “[t]he inquiry…is whether all of the facts alleged,
taken collectively, give rise to a strong inference of scienter, not whether any individual
allegation, scrutinized in isolation, meets that standard.” Tellabs, 551 U.S. at 322-23 (emphasis
in original). However, the Third Circuit has “explicitly approved of scienter analyses that assess
individual categories of scienter allegations individually when it is clear, as it is here, that a
district court ultimately considered the allegations as a whole.” In re Hertz Glob. Holdings Inc,
17
905 F.3d 106, 115 (3d Cir. 2018) (citing OFI Asset Mgmt. v. Cooper Tire & Rubber, 834 F.3d
481, 493 (3d Cir. 2016) (concluding that just because a court is “thorough in explaining why it
found scienter lacking as to each asserted misrepresentation does not suggest that it did not
consider the allegations as a whole”)); see also Avaya, 564 F.3d at 280 (“Although we have
discussed each of the alleged facts bearing on defendants’ scienter one at a time, we have
heeded Tellabs’s command to evaluate [the plaintiffs’] allegations collectively rather than
individually.”). I will, therefore, follow this approach and consider the alleged facts bearing on
scienter individually, while at the same time considering whether, holistically, they give rise to a
strong inference of scienter.
B. Restatement Related Claims – Whether Plaintiff Has Adequately Pled Scienter
1. Confidential Witnesses
Plaintiff first attempts to establish scienter through the testimony of three confidential
witnesses. While a plaintiff in a securities fraud action can support a complaint through
confidential sources, statements from such sources can only be used:
(1) if the complaint sets forth other factual allegations, such as documentary
evidence, which are sufficient alone to support a fraud allegation, or (2) when
the confidential sources are described in the complaint with sufficient
particularity to support the probability that a person in the position occupied by
the [confidential] source would possess the information alleged.
In re Intelligroup Sec. Litig., 527 F.Supp.2d 262, 290 (D.N.J. 2007) (internal citations omitted).
As there is no documentary evidence that alone supports Plaintiff’s fraud allegations, it is
assumed that Plaintiff seeks to utilize the testimony of its confidential sources through the second
method. 4 In order to satisfy the burden under this method, “the complaint must disclose: (1) the
While Plaintiff alleges that “CW1 identified further documents that support fraud—specifically
internal emails discussing how the $5 million Verizon contract was still unsigned in April 2016,”
ECF No. 68 at 46, CW1 has identified no such documents, but rather only speculated that “there
4
18
time period that the confidential source worked at the defendant-company, (2) the dates on which
the relevant information was acquired, and (3) the facts detailing how the source obtained access
to the information.” Id. (citing See Cal. Pub. Employees' Ret. Sys. v. Chubb Corp., 394 F.3d 126,
146 (3d Cir. 2004) (“Chubb ”)). Additionally, “allegations attributed to the information obtained
from a confidential source must contain specific details regarding the basis for the source's
personal knowledge and describe supporting events in detail.” Id. (citing Chubb, 394 F.3d at
146). Where these requirements are not met, courts must ignore the insufficiently described
witness' statements for purposes of evaluating the plaintiff's allegations. Id.; Avaya, 564 F.3d at
263 (“If [confidential] source allegations are found wanting with respect to these criteria, then
[courts] must discount them steeply.”).
Plaintiff has, in some respects, adequately described the confidential witnesses with
particularity, including by alleging “the duration of each CW's employment [and] the time period
during which the CWs acquired the relevant information,” Avaya,564 F.3d, at 263;
see Chubb, 394 F.3d at 150. Nonetheless, the confidential witness statements on which Plaintiff
relies suffer from a more fundamental problem: they do not contain specific details regarding the
basis for the source’s personal knowledge and/or do not describe supporting events in detail.
Plaintiff alleges that CW1, a financial analyst, CPA, and certified fraud examiner who
worked at the company for around a year in 2015 and 2016, had personal knowledge of
Rosenberger’s involvement in the allegedly improper recognition of the $5 million Verizon
may be internal Company emails” discussing the Verizon contract. AC at ¶ 165. Furthermore,
the reference in the Amended Complaint to an email from an undisclosed AT&T employee to an
undisclosed Synchronoss recipient indicating that AT&T would proceed with a transaction, id. at
¶ 175, provides no help to Plaintiff’s argument that Individual Defendants acted with scienter, as
it does not suggest any wrongdoing by Synchronoss, and, moreover, neither Waldis nor
Rosenberger is alleged to have received the email.
19
contract. AC at ¶ 165. Specifically, Plaintiff contends that a conversation that CW1 allegedly
overheard establishes that Rosenberger knew that the Verizon contract was unsigned, but
approved recognition of the contract’s revenue nevertheless. In that connection, CW1’s sole
claim is that, while at a meeting in Bridgewater in April 2016, he saw Rosenberger ask
Synchronoss’s Executive VP and General Manager Joel Silverman whether the Verizon contract
had yet been signed, even though the company had already recognized the $5 million for
accounting purposes. Id. However, simply inquiring about the status of the contract does not
demonstrate, as Plaintiff contends, that Rosenberger knew that it was unsigned at the time she
asked the question, a flaw that alone undermines Plaintiff’s reliance on CW1’s testimony. But,
just as importantly, even assuming that Rosenberger was aware that the contract had not been
signed at that point, Rosenberger’s question provides little assistance in determining whether she
was acting with a fraudulent state of mind. Indeed, this was precisely the case in National Junior
Baseball League, where the plaintiff attempted to use the statements of a confidential witness to
establish that the defendant knew the failure to book an impairment charge was improper and
violated GAAP. Nat’l Junior Baseball League v. Pharmanet Dev. Grp. Inc., 720 F. Supp. 2d
517, 547 (D.N.J. 2010). There, the plaintiff’s allegations were insufficient because they
contained no “facts, such as actual knowledge on the part of the Defendants of PharmaNet's
misconduct, that would give rise to a duty to make an impairment charge.” Id. Here too, as
explained infra, the relevant GAAP rules are not as clear as Plaintiff avers, and nothing in
CW1’s recollection of the Bridgewater meeting would raise an inference that Rosenberger knew
that recognizing revenue prior to contractual signing was potentially improper. See OFI Asset
Mgmt., 834 F.3d at 496 (disregarding statements of confidential witness that, “even if true,” were
20
“not sufficiently on point”). The testimony of CW1 is, therefore, discounted in establishing
scienter.
The testimony of CW2 fares no better. Plaintiff alleges that CW2 was involved in
Synchronoss’s allegedly booking revenues of approximately $7 million in connection with two
AT&T purchase transactions in late 2015 that did not occur. AC at ¶¶ 174-75. CW2, a long-time
Synchronoss employee at the Vice President level, stated that he was “expressly tasked by
Company management in 2016 with finding a way to retroactively justify the revenue numbers
[from the AT&T transactions] that had already been reported in 201.” Id. at ¶ 10. He also relayed
that “the practice [of booking revenues early and seeking to justify them later] also repeatedly
caused Synchronoss to scramble to make [its] financial reports seem legitimate to auditors.” Id.
at ¶11. CW2’s testimony is too imprecise and disconnected from Individual Defendants in this
case to provide much help in establishing scienter. Indeed, CW2’s barebone statements do not
relate the circumstances surrounding the alleged management directive or explain how CW2
learned of the alleged Company practice, thus falling well short of the requirement that CW
testimony must “describe supporting events in detail.” Intelligroup, 527 F.Supp.2d at 290. More
importantly, however, the Amended Complaint contains no facts concerning who in management
tasked CW2 with retroactively justifying the revenue numbers, including whether Waldis or
Rosenberger had any involvement. Thus, Plaintiff has failed to demonstrate that CW2’s
statements support a finding of scienter against any of the Individual Defendants. See id. at 364
(citing In re Watchguard Sec. Litig., No. 05-678, 2006 WL 2927663, at *6 (W.D. Wash. Oct. 12,
2006) (discounting testimony of confidential source whose “allegations are silent as to the
knowledge or conduct of any [d]efendant.”)).
21
The testimony of CW3, a former Synchronoss accountant who worked at the company
from 2011 to April 2017 and “indirectly” reported to Rosenberger, likewise fails to support an
inference of scienter. CW3 provided details about the $25 million Verizon transaction that the
company allegedly prematurely booked in the third quarter of 2016. CW3 did not personally
witness either Rosenberger or Waldis’s involvement in the deal, but rather recalled that a Senior
Accountant at Synchronoss reacted by “kicking and screaming” to a management directive to
book the $25 million as revenue because the Company lacked substantiation for the deal, and
that Rosenberger allegedly overruled the accountant’s objections. AC at ¶ 94. According to
CW3, this deal was “infamous” within the Company. Id. However, nowhere in the Amended
Complaint is CW3 ever alleged to have had any direct contact with Rosenberger, which is
unsurprising given that CW3 reported only “indirectly” to her. Nor does the Amended Complaint
give any basis for the supposed “infamy” of the deal. More importantly, Plaintiff does not allege
that CW3 was personally involved in the transaction or that CW3 had first-hand knowledge.
Thus, CW3 testimony amounts to nothing more than second-hand retelling and generalized
rumor, neither of which provides value in trying to infer scienter. See Intelligroup, 527
F.Supp.2d at 360-61 (discounting information provided by confidential witnesses who were “not
providing firsthand information,” but rather were repeating statements the witnesses heard and
holding that statements that are “nothing but rumor . . . cannot amount to either direct or
supplemental evidence and, therefore, [are] of no value for the purposes of the Court’s
inquiry”); see also Nat'l Junior Baseball League, 720 F. Supp. 2d at 540.
CW3 also makes generalized complaints about the company’s accounting practices,
reporting that Rosenberger utilized the “flash file” that Latyszonek prepared on a weekly basis to
determine which expenses to bury or remove “down below the line” so as to show attractive, but
22
false, margins in the Company’s financial reports. Yet, these allegations are broad and general,
and do not “provide any particulars regarding…how much revenue was improperly recognized.
Plaintiff[’s] allegations do not suffice.” Nat'l Junior Baseball League, 720 F. Supp. 2d at 539.
The “flash file” refers to a wide array of Company financial information, and Plaintiff does not
appear to allege that any specific “flash file” contained specific facts contradicting any specific
public statement. To the extent that Plaintiff alleges that certain accounting decisions—such as
the alleged reclassification of the salaries of Openwave sales employees as R&D costs—were
included in these flash files, which is not clear from the Amended Complaint, Plaintiff has not
adequately alleged that either Individual Defendant was involved in this decision. As the Third
Circuit recently held, “vague[]” allegations about “widely distributed” reports do not state with
particularity facts giving rise to a strong inference of scienter where there are no allegations that
any defendant knew a particular statement was false when made. Martin v. GNC Holdings, Inc.,
757 F. Appx. 151, 154 (3d Cir. 2018).
Thus, the testimony of the CWs does not support an inference of scienter.
2. GAAP Violations
Plaintiff next argues that Individual Defendants’ involvement in GAAP violations that
led to the restatement of Synchronoss’s financials is grounds for inferring scienter. Allegations of
GAAP violations “present nothing but a sub-group of the inaccurate public statement category of
securities cases.” Intelligroup, 527 F.Supp.2d at 286. In that regard, courts have uniformly held
that allegations of scienter based on GAAP violations do not create the requisite strong inference
of scienter unless the plaintiff’s complaint alleges “more.” See Christian v. BT Grp. PLC, No.
17-497, 2018 WL 3647213, at *8 (D.N.J. Aug. 1, 2018) (“GAAP violations do not themselves
create a strong inference of scienter. Courts have found that GAAP violations can support an
23
inference of scienter, but do not independently create such an inference.”); Nat'l Junior Baseball
League, 720 F. Supp. 2d at 557; see also Wyser–Pratte Mgmt. Co. v. Telxon Corp., 413 F.3d
553, 563 (6th Cir. 2005); Ferris, Baker Watts, Inc. v. Ernst & Young, L.L.P., 395 F.3d 851, 855
(8th Cir. 2005); Saxton, Inc. Sec. Litig., 156 Fed.Appx. 917, 920 (9th Cir. 2005); Pirraglia v.
Novell, Inc., 339 F.3d 1182, 1192 (10th Cir. 2003); Abrams v. Baker Hughes, Inc., 292 F.3d 424,
432 (5th Cir. 2002); Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1208 (11th Cir.
2001); Stevelman v. Alias Research, Inc., 174 F.3d 79, 84–85 (2d Cir. 1999); Malone v.
Microdyne Corp., 26 F.3d 471, 479 (4th Cir. 1994). The decisions in this Circuit are no
exception. Westinghouse Sec. Litig., 90 F.3d 696 (3d Cir. 1996).
The court in Intelligroup summarized the pleading requirements in this context:
it appears that the “more” envisioned by the courts consists of the panoply of
such facts which could sufficiently indicate that defendants had clear reasons to
doubt the validity of the issuer's financials but, nonetheless, kept turning a blind
eye to all such factual “red flags.” See Rothman [v. Gregor], 220 F.3d 81 [(2d.
Cir. 2000)] (plaintiffs did not adequately plead scienter where the complaint
alleged that defendants' policy of expensing prepaid royalties was contrary
to GAAP, resulting in nearly $74 million in royalties continuing to be reported
as assets long after they should have been expensed); [In re] Comshare [Sec.
Litig.], 183 F.3d [542,] 553 [(6th Cir. 1999)] (plaintiffs failed to plead scienter
properly—although plaintiffs' allegations combined both GAAP violations and
claims of failure to adequately monitor relevant information—since plaintiffs
did not allege specific facts to show that defendants knew or could have known
about the accounting errors, “or that their regular procedures should have alerted
them to the errors sooner than they did”) ... In re Health Mgmt. Inc. Sec.
Litig., 970 F.Supp. 192 (E.D.N.Y. 1997) (a strong inference of recklessness is
sufficiently pled where the complaint alleges that defendant was actually
advised of but ignored “red flags”).
Intelligroup, 527 F.Supp.2d at 287.
In attempting to allege something “more” than mere GAAP violations, Plaintiff relies
heavily on the supposed simplicity of the rules allegedly violated, an argument that it supports
24
with out-of-circuit case law.5 See In re MicroStrategy, Inc. Sec. Litig., 115 F. Supp. 2d 620, 638
(E.D. Va. 2000) (“[I]f the GAAP rules and MicroStrategy accounting policies Defendants are
alleged to have violated are relatively simple, it is more likely that the Defendants were aware of
the violations and consciously or intentionally implemented or supported them, or were reckless
in this regard.”). However, courts in this district interpreting MicroStrategy, have been hesitant
to follow its lead in placing heavy emphasis on the simplicity of the at-issue GAAP rules. See,
e.g., In re Bio-Tech. Gen. Corp., No. 02-6048, 2006 WL 3068553, at *10 (D.N.J. Oct. 26,
2006), aff'd sub nom., 283 F. App'x 887 (3d Cir. 2008) (“Even a perfunctory analysis of In re
Microstrategy, the case to which this Court cited on the “simple nature” point, reveals that
simplicity of accounting guidelines is merely one of several factors to be examined in
determining whether scienter is sufficiently pled.”). The Intelligroup court reasoned, moreover,
that,
in cases examining alleged wrongs by an issuer rather than an accountant, GAAP
violations might be given additional significance only where the provisions of
GAAP so coincide with conclusions obvious to any business person and present
recitals of knowledge so common to the business—rather than accounting—
community, that a violation of this type of GAAP provision equates to a selfevident business nonsensicality which cannot be made by a defendant with a
non-culpable state of mind.
Intelligroup, 527 F. Supp. 2d at 352. In that regard, Plaintiff contends that Defendant violated
three GAAP rules, all of which are so simple that the violations alone must be grounds for
inferring scienter.
5
As already discussed, the statements of the CWs do not support a finding of scienter, and,
likewise, do not add to Plaintiff’s attempt to plead scienter based on GAAP violations. See
Chubb, 394 F.3d at 153–54 (rejecting plaintiff’s attempt to rely on statements of confidential
witnesses to infer scienter in connection with accounting violations when Plaintiff had failed to
describe the confidential witnesses with particularity).
25
Plaintiff first argues that recognizing revenue prior to contractual signing in connection
with the two Verizon transactions and one AT&T transaction violated two accounting standards
set forth as ASC 985-605-25-16 and -17. These provide that revenue from software agreements
“shall not be recognized on any element of the arrangement unless persuasive evidence of an
arrangement exists,” and where a vendor “has a customary business practice of using written
contracts, evidence of the arrangement is provided only by a contract signed by both parties.”
AC at ¶¶ 155-56 (citing ASC 985-605-25-16, -17). Put plainly, Plaintiff argues that these
accounting standards stand for the proposition that “[w]here a company has…a practice of using
written contracts, revenue can be recognized only if a contract has been signed by both parties
and is ‘in hand’ prior to recognizing the revenue.” ECF No. 68 (citing AC at ¶¶ 7, 155).6 Implicit
in these rules, then, is that a written contract is required in order to recognize revenue only when
the parties customarily use written contracts. Thus, in order to allege that either of the Individual
Defendants violated these accounting standards, Plaintiff must allege that Synchronoss has a
“customary business practice of using written contracts,” but that the Company, nonetheless,
recognized revenue before a signed, written contract was in hand.
Plaintiff, however, has failed to allege the existence of such a customary business
practice, such that the supposed accounting violations are not the “self-evident business
nonsensicalit[ies] which cannot be made by a defendant with a non-culpable state of mind.”
Plaintiff also argues that Defendants violated the general Ernst & Young (“E&Y”) guidelines
on revenue recognition, which state: “[R]evenue recognition is precluded if a contract signed by
both parties is not in hand at the end of the accounting period, even if the contract is executed
soon thereafter and management believes that execution of the contract is perfunctory.” AC at ¶
7. These guidelines are not specific to Synchronoss, however, and, moreover, Plaintiff has not
referenced any case law finding scienter based on the mere violation of an accounting firm
guideline.
6
26
Intelligroup, 527 F. Supp. 2d at 352. For example, Plaintiff, in support of its argument that the
Company had a practice of recognizing revenue only upon contractual signing, emphasizes the
following unremarkable statements that make no mention of recognizing revenue: Waldis
mentioning on a Q42014 earnings call “signing a substantial expansion of our contract with
Verizon Wireless”; statements in the 2016 form 10k that the company “generate[s] a substantial
portion of our revenues … from contracts that extend up to 60 months from execution” and that
“in periods of economic slowdown…the average time between our initial contact with a
prospective customer and the signing of a sales contract increases”; and a signed master services
agreement with AT&T stating that “This Agreement and any Orders placed hereunder may be
amended or modified only by a written document signed by the authorized representative of the
Party against whom enforcement is sought.” AC at ¶ 154. These statements, which perhaps
suggest that Synchronoss had a practice of executing written contracts with AT&T and Verizon,
do not elucidate anything about the company’s revenue recognition practices with respect to
these contracts. The only statement that Plaintiff cites in which any Defendant mentions revenue
recognition—Rosenberger explaining to analysts that a Verizon transaction was documented in a
“25 million license deal signed and recognized in the [third] quarter,” id. at ¶ 177—merely
indicates that Rosenberger believed that the Verizon contract had been signed and recognized as
revenue. It does not reveal, however, the Company’s customary business practice.7
Also unavailing is Plaintiff’s argument that scienter is reinforced because Waldis and
Rosenberger allegedly did not disclose the details of the Sequential transaction in a call with an
analyst. AC at ¶¶ 115-20. Plaintiff cites comScore for the proposition that where defendant
“sp[eaks] extensively” on investor calls about an issue and knows it is “a subject about which
investors and analysts often inquire[],” scienter is “reinforce[d].” Fresno Cty. Employees' Ret.
Ass'n v. comScore, Inc., 268 F. Supp. 3d 526, 552 (S.D.N.Y. 2017). However, there, it was
“undisputed that [defendants] were aware of and made statements about comScore's revenue
recognition practices[.]” That is not the case here.
7
27
Underscoring the deficiencies in Plaintiff’s allegations is that the only statement
referenced by either party that concerns the Company’s revenue recognition practices is a 2017
SEC disclosure issued in conjunction with the Restatement explaining that Synchronoss had a
practice, in certain cases, of recognizing revenue prior to contractual signing. According to the
disclosure, the Company, in some instances, determined that “persuasive evidence of an
arrangement” existed for revenue recognition purposes, not upon contractual signing, but upon
the Company’s “receipt from [the] customer of written confirmation of the order and
commitment to pay the agreed price, such as a quote approval sent by the customer in response
to a quote issued by the Company[.]”8 Frank Decl., Ex. C (2017 10-K/A) at 3, 55, 63, ECF No.
66-5. While this disclosure does not definitively demonstrate the Company’s revenue recognition
practices for its AT&T or Verizon contracts, it is telling that Plaintiff has presented nothing
comparable suggesting that the Company recognized revenue from those contracts only upon
contractual signing. At this stage, then, Plaintiff, has failed to meet the PLSRA’s heightened
pleading standard to demonstrate that the Plaintiff actually violated the GAAP rule, let alone
shown that the rule violated was “simple.”
Thus, this case is distinguishable from the cases on which Plaintiff relies, in which courts
inferred scienter based on straightforward violations of GAAP revenue recognition rules and
clear company policy regarding revenue recognition. See MicroStrategy, 115 F. Supp. 2d at 637
(Plaintiff alleged that the revenue recognition policy was so obvious, not only because of GAAP,
but because of the company’s “own publicly acknowledged policy of not recognizing revenues
from an arrangement until ‘evidence of the arrangement is provided ... by a contract signed by
8
The Court may take judicial notice of this public SEC filing. See In re NAHC, Inc. Sec. Litig.,
306 F.3d 1314, 1331 (3d Cir. 2002) (holding that district court may rely on “documents filed
with the SEC, but not relied upon in the Complaint”).
28
both parties’”); In re Medicis Pharm. Corp. Sec. Litig., No. 08-1821, 2010 WL 3154863, at *6
(D. Ariz. Aug. 9, 2010) (noting that defendant specifically identified the Company's reserve
accounting methodology as one of the company’s most “‘critical accounting policies’”); In re
Ravisent Techs., Inc. Sec. Litig., 2004 WL 1563024, *9 (E.D. Pa. July 13, 2004) (alleged
violation of defendant’s “crystalline policy” that “revenue was to be recognized when
[defendant] was notified it was delivered”).
Moreover, the remaining GAAP rules that Plaintiff alleges that Defendants violated
plainly involve the type of complex accounting judgments that are insufficient to support an
inference of scienter. Specifically, Plaintiff contends that a number of licensing contracts that
Synchronoss entered into violated a GAAP rule related to the accounting treatment of a group of
related contracts. This standard states that
Software vendors may execute more than one contract or agreement with a
single customer. However, a group of contract or agreements may be so closely
related that they are, in effect, parts of a single arrangement and should be
viewed as one multiple-element arrangement when determining the appropriate
amount of revenue to be recognized in accordance with this Subtopic.
ASC 985-605-55-4. Plaintiff alleges that the Company’s accounting treatment of various
transactions violated this rule, including, 1) recognizing as revenue the $9.2 million licensing fee
paid as part the sale of the Activation business to Sequential, and 2) recognizing as revenue a $10
million patent-dispute settlement payment by Openwave as standalone license revenue when it
should have treated this $10 million not as revenue but rather as a reduction of the purchase price
Synchronoss paid to acquire Openwave.9
9
Plaintiff also alleges that the historical accounting for the Openwave settlement violated ASC
605-25-25-3, which states that “separate contracts with the same entity or related parties that are
entered into at or near the same time are presumed to have been negotiated as a package and
shall, therefore, be evaluated as a single arrangement in considering whether there are one or
more units of accounting.” However, according to the SEC guidance that Plaintiff cites in the
29
The parties dispute whether this rule is even applicable to the at-issue transactions.
Plaintiff characterizes the standard as requiring “the vendor to account for the component
agreements as part of a multiple-element arrangement rather than as separate transactions” where
“a group of contracts or agreements is formed between the same software vendor and customer.”
AC at ¶ 188. Defendants, in contrast, dispute the applicability of the rule to the licensing
contracts at issue, arguing that “[t]he standard is more narrow than that and addresses the
recognition of revenue when a software vendor has multiple software contracts with a single
customer that amount to a single arrangement.” ECF No. 66 at 48. Regardless of whose
interpretation of the rule is correct, Plaintiff’s allegations do not demonstrate that deciding
whether several contracts are so closely related so that they must be treated as a single agreement
is a decision that is “obvious to a business—rather than an accounting— mind.” See Intelligroup,
527 F. Supp. 2d at 352 (“While Plaintiffs' submissions offer a long list of GAAP violations in
Intelligroup's Statements, Plaintiffs' pleadings are void of any allegations that the violations
involved errors so obvious to a business—rather than accounting—mind that Defendants must
have been aware of the wrongs.”). Any error in the application of this complex rule, standing
alone, does not support a strong inference of scienter.
Based on the alleged GAAP violations, Plaintiff has failed to show that Individual
Defendants had clear reasons to doubt the validity of the Synchronoss’s financials but,
Amended Complaint, application of this rule is a “challenge” that “requires judgment” and that
the SEC is “willing to consider reasonable judgments” in the application of the standard. AC at ¶
212 (citing Eric C. West, Speech by SEC Staff: Remarks before the 2007 AICPA National
Conference on Current SEC and PCAOB Developments, December 10, 2007,
https://www.sec.gov/news/speech/2007/spch121007ecw.htm at 2.). Plaintiff fails to demonstrate
how an alleged violation of an accounting principle that requires the application of reasonable
judgments could possibly give rise to a strong inference of scienter.
30
nonetheless, kept turning a blind eye to all such factual “red flags.” Accordingly, the GAAP
violations alleged here do not support an inference of scienter.
3. Magnitude of Restatement
Plaintiff also argues that the magnitude of the Synchronoss’s 2018 Restatement, which
revealed that the Company’s revenues and income had been substantially overstated, raises an
inference of scienter. “Although a restatement of financial results is probative of scienter, more is
needed to support a strong inference of scienter.” In re Bio–Tech. Gen. Corp. Sec. Litig., 380 F.
Supp. 2d 574, 588 (D.N.J. 2005). This is true even when the relative size of the restatement is
large. See id. at 581 (dismissing securities fraud claims despite company’s restatement resulting
in a 90% reduction in revenue, noting that such allegations do not, without more, “establish
motive sufficient for creating a strong inference of scienter”); see also In re Turquoise Hill Res.
Ltd. Sec. Litig., No. 13-08846, 2014 WL 7176187, at *7 (S.D.N.Y. Dec. 16, 2014) (“The fact of
an error, even a large error, does not suggest knowledge or intent to misstate when the financial
results were originally published.”).
Here, Defendants do not dispute that the magnitude of the Restatement was substantial:
revenues were overstated by $180 million or 14.8%, and the previously reported net income of
$93.5 million was restated to a cumulative loss of $40 million. However, the mere fact of this
large Restatement does not create a strong inference of scienter. In re Hertz is instructive on this
point. There, the defendant had to restate its financials over three fiscal years and resulted in a
pre-tax income reduction of $90 million for 2012 and $72 million for 2013. No. 13-7050, 2017
WL 1536223, at *16 (D.N.J Apr. 27, 2017). The court found that these overstatements were the
result of a “pernicious… combination of discrete accounting errors that occurred over fifteen
areas… and a minimum of twenty adjustments that were necessary across those areas.” Id.
31
Nonetheless, as in Hertz, the size and scope of the restatement can only get Plaintiff so
far. As the court there found,
the Restatement merely describes mismanagement, Plaintiffs were required to
supplement it with additional allegations of wrongdoing. They were required to
allege that Defendants were “aware that mismanagement had occurred and made
a material public statement about the state of corporate affairs inconsistent with
the existence of the mismanagement.” Hayes, 982 F.2d at 106 (citing Shapiro
[v. UJB Fin. Corp.], 964 F.2d[ 272,] 281–83 [(3d. Cir. 1992)]). They did not do
so.
Id. at *17. On appeal, the Third Circuit affirmed this finding. In re Hertz, 905 F.3d at 116
(citing Dobina v. Weatherford Int’l Ltd., 909 F.Supp.2d 228, 251 (S.D.N.Y. 2012) (explaining
that the magnitude of a restatement does not give rise to a strong inference of scienter if there are
no allegations “that the ... defendants had any contemporaneous basis to believe that the
information they related was incorrect”)). Here too, Plaintiff’s argument rests heavily on the
mere fact that the Company significantly restated its financials, which revealed serious
deficiencies in the Company’s accounting practices. But Plaintiff has failed to buttress this fact
with “particularized allegations of fraudulent intent” on the part of the Individual Defendants.
Accordingly, the size and scope of the Restatement of Synchronoss’s financials “provide at most
some inference of scienter but not a strong inference.” Id. at 117.
4. Size of Contracts/Key Customers Involved
Plaintiff also attempts to plead scienter based on the size of the contracts at issue and
their relative importance to Synchronoss’s business. “[U]nder the core operations doctrine,
misstatements and omissions made on ‘core matters of central importance’ to the company and
its high-level executives gives rise to an inference of scienter when taken together with
additional allegations connecting the executives’ positions to their knowledge.” In re Urban
Outfitters, Inc. Sec. Litig., 103 F.Supp.3d 635, 653-654 (E.D. Pa. 2015); Nat'l Junior Baseball
32
League, 720 F. Supp. 2d at 556 (“[A] person's status as a corporate officer, when considered
alongside other allegations, can help support an inference that this person is familiar with the
company's most important operations.) (citations omitted). In other words, “it is not
automatically assumed that a corporate officer is familiar with certain facts just because these
facts are important to the company's business; there must be other, individualized allegations that
further suggest that the officer had knowledge of the fact in question.” In re Heartland Payment
Sys., Inc. Sec. Litig., No. 09-1043, 2009 WL 4798148, at *7 (D.N.J. Dec. 7, 2009); City of
Roseville Employees' Retirement Sys. v. Horizon Lines, Inc., 686 F.Supp.2d 404, 423 (D. Del.
2009) (“While it is true that false or misleading statements by key executives regarding a
company's lead product or core business practices will weigh in favor of finding a strong
inference of scienter, [courts] will not make such an inference ‘absent particularized allegations
showing that defendants had ample reason to know of the falsity of their statements.’”); Nat'l
Junior Baseball League, 720 F.Supp.2d at 556 (“Plaintiff cannot rely on th[e core purpose]
doctrine when it has failed to allege other individualized allegations that [the individual
defendants] had knowledge of the facts at issue.”).10
Here, Plaintiff alleges that the Company’s contracts with AT&T and Verizon represented
an overwhelming segment of the company’s business, accounting for as much as 75% of
In the cases cited by Plaintiff in support of its “core business” argument, the courts treated
defendants’ “core business” allegations as one small piece of a larger picture establishing that the
defendants acted with scienter, or did not discuss the relevance of the “core business” allegations
at all. See In re Toronto-Dominion Bank Sec. Litig., 2018 WL 6381882, at *18 (D.N.J. Dec. 6,
2018); Roofers Pension Fund v. Papa, 2018 WL 3601229, at *24 (D.N.J. July 27, 2018);
Washtenaw Cty. Emps. Ret. Sys. v. Avid Tech., Inc., 28 F. Supp. 3d 93, 113 (D. Mass. 2014) (no
discussion of “core business” allegation beyond quoting plaintiff’s allegation); Mill Bridge V,
Inc. v. Benton, 2009 WL 4639641 at *30 (E.D. Pa. Dec. 3, 2009) (defendants pointed to “no
other clear motivating factor” for executive committee member’s trades in company securities at
suspicious time); In re Baan Co. Sec. Litig., 103 F. Supp. 2d 1, 21 (D.D.C. 2000) (no discussion
of “core operations”).
10
33
revenues during the relevant time period. AC at ¶ 6. However, in that regard, Plaintiff fails to
adequately support its theory with specific allegations that Defendants acted with the requisite
fraudulent intent with respect to the Verizon and AT&T contracts. Absent any particularized
allegations, Plaintiff’s “core business” argument amounts to an attempt to impute knowledge to
Individual Defendants of the alleged fraud only because they held leadership positions at the
Company and, hence, “must have known” of every detail of the Company’s business with key
customers. Such an argument, without more, cannot support an inference of scienter.
5. Insider Sales
Plaintiff contends that Rosenberger and Waldis’s selling of company stock in the year
leading up to the discovery of the alleged fraud presented them with a motive and opportunity to
commit fraud, thereby supporting an inference that they acted with scienter. While the Third
Circuit recognizes that in the wake of the Supreme Court’s decision in Tellabs ‘“motive and
opportunity’ may no longer serve as an independent route to scienter,” particularized allegations
regarding motive and opportunity may, in combination with other allegations, support a strong
inference of scienter. Avaya, 564 F.3d at 277; see also Tellabs, 551 U.S. at 323–25. In that
connection, Plaintiff alleges that Rosenberg’s and Waldis’s sale of company stock during the
class period is indicative of scienter. Courts “will not infer fraudulent intent from the mere fact
that some officers sold stock.” Burlington Coat Factory, 114 F.3d at 1424. But if the stock sales
are unusual in scope or timing, they may support an inference of scienter. See id. Whether a sale
is “unusual in scope” depends on factors such as “the amount of profit made, the amount of stock
traded, the portion of stockholdings sold, or the number of insiders involved.” In re Suprema,
438 F.3d at 277 (citing Wilson v. Bernstock, 195 F. Supp. 2d 619, 635 (D.N.J. 2002)). Other
factors relevant to scope and timing are whether the sales were “normal and routine,” and
34
whether the profits were substantial relative to the seller's ordinary compensation. Id. (citing
Burlington Coat Factory, 114 F.3d at 1423).
Here, Plaintiff alleges that Waldis sold 569,800 shares during the Class Period for
proceeds exceeding $18 million while Rosenberger sold 51,593 shares for proceeds exceeding
$1.4 million. AC at ¶ 19. Plaintiff alleges that Rosenberger’s insider sales suspiciously ramped
up just prior to her resignation to levels more than 200% to 300% in prior periods. Id. at ¶ 349.
Plaintiff also alleges that Waldis, meanwhile, cashed out $18 million in insider trading profits at
lofty prices before revelations about the fraud. Id. at ¶ 351.
As Plaintiff concedes, every single stock sale effected by Individual Defendants cited in
the Amended Complaint was effected pursuant to SEC Rule 10b5-1 plans.11 See id. at ¶ 352.
Pursuant to SEC Rule 10b5-1, a person’s trading is not “on the basis of” material non-public
information, such as the allegedly fraudulent practices here, if the person adopted, and sold their
securities pursuant to a written trading plan consistent with the terms of Rule 10b5-1. Courts
have consistently held that “[t]rades made under automatic trading plans are of minimal value in
establishing an inference of scienter.” Lovallo v. Pacira Pharm., Inc., No. 14-06172, 2015 WL
7300492, at *13 (D.N.J. Nov. 18, 2015) (citing Avaya, 564 F.3d at 279); In re Synchronoss Sec.
Litig., 705 F. Supp. 2d 367, 410, 410 n.56 (D.N.J. 2010) (evidence of trading under 10b51 trading plans "largely irrelevant" to demonstration of scienter); In re Audible Inc. Sec.
Litig., 2007 WL 1062986, at *12 (D.N.J. April 3, 2007) (noting that “evidence that ... stock sales
11
A Rule 10b5–1 plan is a written plan that allows corporate insiders to make prearranged stock
transactions. See 17 C.F.R. § 240.10b5–1(c). The Court may consider such documents on a
motion to dismiss because they are publicly-filed SEC documents. In re Hertz, 2017 WL
1536223, at *22 n. 10; see also In re NutrSystem, Inc., Derivative Litig., 666 F.Supp. 2d 501,
518 n.11 (E.D. Pa. 2009) (“The Court finds that it can take judicial notice of the public filings
showing that the challenged sales by [defendants] were made pursuant to 10b5–1 plans”) (citing
Oran v. Stafford, 226 F.3d 275, 289 (3d Cir. 2000)).
35
were made via Rule 10(b)5-1 plans ... would prevent those shares from being considered in the
motive and opportunity analysis”)). See also In re NutriSystem,666 F. Supp. 2d at 518 (such
sales “counter any inference that the trades were made on the basis of insider knowledge.”); City
of Roseville, 686 F. Supp. 2d at 425 (defendants stock sales “specified by their Rule 10b5–1
plans…do not marginally increase the likelihood that defendants make knowingly false or
misleading statements out of a desire for personal financial gain”) (citing Avaya, 564 F.3d at
279). While conceding that the trades were effected pursuant to the 10(b)(5)-1 plans, Plaintiff
speculates that the Plans “must have been amended once or more during the Class period,” given
the changes in Waldis’s and Rosenberger’s patterns of stock sales in Synchronoss. AC at ¶ 352.12
Although it is true that a 10b5–1 plan that is amended during the class period might
weaken Individual Defendants’ argument that they did not approve the specific trades at issue, it
is also Plaintiff’s burden to demonstrate when the Plan was adopted or amended. See In re
NutriSystem, 666 F. Supp. 2d at 518 n. 11 (“Although the Court has no information before it as
to when these plans were adopted…the plaintiff has failed to plead facts showing that [the
defendants] possessed material non-public information prior to their challenged sales of
NutriSystem stock. The plaintiff has therefore failed to plead any facts suggesting that the 10b5–
12
Although not addressed in their opposition brief, Plaintiff alleges that the Individual
Defendants’ “motive to engage in the fraudulent scheme is further bolstered by [] Synchronoss’s
incentive compensation system.” AC at ¶ 356. Specifically, Plaintiff alleges motive because the
Company’s compensation system was tied to the Company’s performance, including revenue
and operating income, and that in 2014—prior to the Class Period—the Company added revenue
attributed to its cloud business as a performance metric. Id. at ¶ 356-60. These allegations assert
nothing more than “generalized motives that would be possessed by most corporate directors or
officers [that] do not establish scienter.” In re Bio-Tech., 380 F. Supp. 2d at 581. For this reason,
courts in the Third Circuit frequently reject such allegations as a basis to infer scienter. See id.;
see also In re Dig. Island Sec. Litig., 357 F.3d 322, 331 (3d Cir. 2004) (An allegation that
defendants were motivated by a desire to increase executive compensation was insufficient
because such a desire can be imputed to all corporate officers) (citation and quotation omitted).
36
1 plans were adopted at a time when [the defendants] possessed such information.”). As in
NutriSystem, Plaintiff here can only speculate that the plans were amended, offering the Court
snippets of Individual Defendants’ prior trading activity, but providing no information as to
when or how the Plans were amended. And indeed, just because an individual’s trading activity
appeared to vary from year-to-year or month-to-month, does not necessarily mean that the
10(b)(5)-1 plan was amended: for example, pursuant to such plans, sales might not be triggered
on specific dates, but rather at “times at which each Defendant's restricted stock vested, and that
the sales [might be] made to pay the tax liability incurred as a result of the vesting.” In re Egalet
Corp. Sec. Litig., 340 F. Supp. 3d 479, 512 (E.D. Pa. 2018) (finding that the fact that sales were
made pursuant to a Rule 10(b)(5)-1 plan “weighs heavily against an inference of scienter”). In
fact, according to several Forms 4 included as exhibits to this motion, a number of Individual
Defendants’ sales were triggered for exactly this reason. See, e.g., Frank Decl., Ex. K at 149
(“All sales reported on this Form were effected pursuant to an approved Rule 10b5-1 trading
plan. Represents sale to cover vesting of shares of Restricted Stock.”). Thus, Plaintiff’s
speculation that Waldis and Rosenberger’s 10(b)(5)-1 trading plans must have been amended
does not satisfy the PSLRA’s heightened pleading standards, and trades made pursuant to these
plans are of little probative value in establishing scienter.
What is more, even if Individual Defendants’ transactions were not made pursuant to
Rule 10b5-1 plans, Plaintiff’s allegations regarding the timing and amount of these sales are not
particularly suggestive of scienter. Indeed, even with their sales, Waldis and Rosenberger,
respectively, held 510,929 shares and 15,070 shares at the end of the Class Period, a period over
which Synchronoss’s shares declined in value from $53.67 at the Class Period high to $12.13 at
the end of the Class Period. See Advanta, 180 F.3d at 541 (“Far from supporting a ‘strong
37
inference’ that defendants had a motive to capitalize on artificially inflated stock prices, these
facts [i.e., defendants’ retained holdings] suggest they had every incentive to keep Advanta
profitable.”). Also weighing against a finding of scienter is the fact that Plaintiff provides none
of Waldis’s trading history prior to the Class Period, giving the Court no comparable trades to
determine whether his sales were out of line with his prior trading activity. In fact, according to
public filings cited by Defendants, in 2013, the year before the alleged fraud here supposedly
began, Waldis sold securities yielding proceeds in excess of $15 million, an amount greater than
his proceeds for any subsequent year. See Frank Decl., Ex. K; see also Ronconi v. Larkin, 253
F.3d 423, 435-37 (9th Cir. 2001) (sale by insider of 98% of holdings during class period was
insufficient evidence of scienter where plaintiff failed to provide sufficient trading history to
suggest trading was “dramatically out of line with prior trading practices”).
As for Rosenberger, Plaintiff points to public SEC filings supposedly demonstrating that
Rosenberger’s sales in the months before her departure far exceeded her sales over the same
periods in prior years. For example, Rosenberger sold 12,453 shares in between January 1, 2017
and February 21, 2017, whereas she sold, at most, 9,499 shares over the same period in past
years. Defendants do not contest that Rosenberger may have sold more shares in these specific
periods than in prior years, but they note that publicly filed trading records show that
Rosenberger’s sales of shares were actually consistent year-to-year, and there was nothing
unusual about her trading during the Class Period. See ECF No. 66-1 at 22. Indeed, Rosenberger
held more shares at the end of the Class Period than at the end of any other year. Id. Moreover,
any uptick in sales prior to Rosenberger’s resignation is not particularly surprising, as such a
practice is relatively common. See In re K-tel Int’l, Inc. Sec. Litig., 300 F.3d 881, 896 (8th Cir.
2002) (finding that sales by resigning officer “should not materially impact the scienter analysis”
38
because it is “not unusual for individuals leaving a company . . . to sell shares”) (quoting Greebel
v. FTP Software, Inc., 194 F.3d 185, 206 (1st Cir. 1999)).
Thus, Plaintiff’s motive-and-opportunity allegations in connection with Waldis and
Rosenberger stock sales do not support an inference of scienter.
6. Resignations
Finally, Plaintiff argues, in a footnote, that Rosenberger’s and Waldis’s resignations from
the Company support an inference of scienter. The Third Circuit and other courts have
found resignations of key officers to be insufficient to show that they acted with the requisite
scienter to commit the alleged fraud. In re Interpool, Inc. Sec. Litig., No. 04–321, 2005 WL
2000237, at *17 (D.N.J. Aug. 17, 2005) (citing In re The Great Atl. & Pac. Tea Co., Inc. Sec.
Litig., 103 Fed.Appx. 465 (3d Cir. 2004)) (declining to find that the allegation that nine
employees were fired as a result of accounting irregularities supported a strong inference of
scienter); Abrams v. Baker Hughes Inc., 292 F.3d 424, 434 (5th Cir. 2002) (finding
that resignations, without additional evidence that accounting irregularities were the reason for
the resignations, do not have “any scienter implications”)).
Here, Plaintiff has not provided any additional evidence to infer that the resignations are
suggestive of fraud, arguing only that the timing of the resignations was “uncharacteristic” of the
Company’s typical hiring and firing practices. After the Sequential and Intralinks transactions,
Waldis resigned and was replaced by the Intralinks CEO (though Waldis did become CEO again
after the Class Period), and Rosenberger resigned weeks before the Restatement announcement
(though her impending resignation had already been announced). However, Plaintiff does not
allege any specific connection between these resignations and the alleged fraud, but rather, only
alleges that their resignations coincided with the Company’s acquisition of IntraLinks, when
39
management transitions during such corporate restructurings are typical. Plaintiff fails to allege
any evidence of an “‘extraordinary corporate punishment measure’ applied to any of the
Individual Defendants as is required by other case law in this circuit.” Par Pharma, 2008 WL
2559362, at *12 (citing Intelligroup 527 F. Supp. 2d at 348). Thus, the resignations of Waldis
and Rosenberger do not support an inference of scienter.
7. Opposing Inferences
Taken together, Plaintiff’s allegations are simply not “as compelling as any opposing
inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314. Indeed, aside from the discounted
testimony of the CWs, Plaintiff relies exclusively on circumstantial evidence resulting from
alleged GAAP violations, the fact that the Company restated its financials, that Individual
Defendants had a motive and opportunity to commit fraud based on their alleged insider sales,
and that the Individual Defendants resigned their positions at a suspicious time. What can be
inferred from these allegations is that some degree of corporate mismanagement and lax
accounting practices resulted in the Company restating its financials. Conspicuously missing
from Plaintiff’s allegations, though, is any indication that the Individual Defendants here, Waldis
and Rosenberger, were aware of the fraudulent practices, let alone knowingly or recklessly
participated in such practices. Taken together, then, these allegations fail to support an inference
that is at least as compelling as the opposing inference: “that corporate mismanagement resulted
in accounting irregularities and, at most, negligent misstatements.” In re Hertz, 905 F.3d at 121.
Indeed, in Hertz, the plaintiff relied on circumstantial allegations to support scienter
similar to those that Plaintiff relies on here; for example, that “Individual Defendants resigned as
Hertz discovered [accounting] problems, and that [they] sold portions of their Hertz stock
holdings while those problems were ongoing.” Id. The court concluded that although the “FAC
40
and Restatement make clear that the problems plaguing Hertz and its accounting department
were significant…and that those problems resulted in material misstatements regarding the
Company’s financial condition,” the allegations did “not necessarily suggest that Hertz or its
senior management were engaged in a systemic fraud. More plausible is the suggestion that the
Individual Defendants were just bad leaders.” Id. Based on the allegations, that may be the case
here. Indeed, according to the Company’s Restatement, there is no doubt that Synchronoss’s
accounting department performed its job poorly, perhaps even fraudulently, and that
Rosenberger and Waldis possessed positions of power within the Company while this occurred.
But the inference that Rosenberger and Waldis acted with fraudulent intent is not more plausible
than the inference that they simply did a poor job overseeing the accounting department. Such an
inference cannot support a securities fraud claim.
C. Forward-Looking Statements
In addition to arguing that that Plaintiff’s Restatement-related claims must be dismissed
because they have not adequately pled scienter, Defendants also argue that Plaintiff’s claims
related to Defendant’s allegedly misleading or fraudulent forward-looking revenue projections
are protected by the PSLRA safe harbor for forward-looking statements. The PSLRA's Safe
Harbor provision, 15 U.S.C. § 78u–5(c), “immunizes from liability any forward-looking
statement, provided that: the statement is identified as such and accompanied by meaningful
cautionary language; or is immaterial; or the plaintiff fails to show the statement was made with
actual knowledge of its falsehood.” Avaya, 564 F.3d at 254.
The Court has already found that Plaintiff failed to allege that Defendants had actual
knowledge of their statements’ falsehood. In its briefing, Plaintiff relies on the exact same
allegations as to why Defendants had actual knowledge that its revenue projections were false
41
(i.e. the Company’s “established practice of falsely recognizing revenue from contracts that had
not been signed with its biggest customers (AT&T and Verizon) since at least 4Q2015” and
“fail[ing] to disclose that their forecasts were part and parcel of an ongoing revenue recognition
scheme”). See ECF No. 68 at 57-58. As already explained, the sole bases for Plaintiff’s “actual
knowledge” allegation are the statements of the CWs, which are not reliable. Therefore, because
Plaintiff has failed to adequately plead that Defendants were actually aware of the falsity of the
revenue projections, Plaintiff’s claims based on forward-looking statements fail, and the Court
need not address the adequacy of Defendants’ cautionary language. See In re Bio-Tech., 380 F.
Supp. 2d at 597 (“Because this Court has concluded that Plaintiff has failed to create a strong
inference of scienter with respect to BTG's statements concerning Oxandrin, the Court need not
address the applicability of the [first prong of the] PSLRA's safe harbor provision for forwardlooking statements.”).
D. Section 20(a)
Plaintiff also alleges that Individual Defendants are liable under Section 20(a) of the
Exchange Act. This statute reads, in pertinent part:
§ 78t. Liability of controlling persons and persons who aid and abet violations
(a) Joint and several liability
...
Every person who, directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder shall also be
liable jointly and severally with and to the same extent as such controlled person
to any person to whom such controlled person is liable ...
15 U.S.C. § 78t(a); see also Suprema, 438 F.3d at 285 (discussing the statute). However,
“liability under Section 20(a) is derivative of an underlying violation of Section 10(b) by the
controlled person.” Avaya, 564 F.3d at 252 (citing In re Alpharma Sec. Litig., 372 F.3d 137, 153
42
(3d Cir. 2004)). Because Plaintiff fails to sufficiently plead a claim under Section 10(b), it is
“impossible to hold the [Individual Defendants] liable under § 20(a).” Shapiro, 964 F.2d at 279.
The Section 20(a) claims against Individual Defendants Waldis and Rosenberger are therefore
also dismissed.
IV.
CONCLUSION
For the foregoing reasons, Defendants’ motion is granted and Plaintiff's claims are
dismissed without prejudice; however, Plaintiff shall have 30 days from the date of the Order
accompanying this Opinion to amend its Amended Complaint consistent with this Opinion.
Dated: June 28, 2019
/s/ Freda L. Wolfson
Hon. Freda L. Wolfson
Chief United States District Judge
43
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